Living with COVID-19 and living with volatility
Several Australian states have ongoing elevated funding tasks, and more issuance to do could mean less ability to step back from challenged markets. Meanwhile, the Australian Office of Financial Management (AOFM) and others are dealing with the end of Reserve Bank of Australia (RBA) market intervention.
KENNA For the semis with large funding requirements it is true that it is harder to avoid weaker patches in the market. Sometimes we have been able to execute in almost perfect conditions but there are other times when it is more challenging. We tend to oscillate between different methods of execution based on the market at the time.
The issuance run rate is something we definitely track. But it doesn’t always dictate what our execution requirements will be. With a larger funding task and more volatile conditions, we have run a pretty significant liquidity position that allows us some flexibility to navigate markets.
The main impact of the larger funding task is probably on the split across reverse enquiry, tender and syndication. With a higher funding task and volatile market conditions it is harder to stay ahead of the task than it would be with a smaller programme.
KELLY There will be times at which we come to market and others will be confused as to why we have done it. Although we are always looking ahead, we are also competing for air time among our peer group, whether it be an AOFM transaction or one of the states. The reality is the number of clear days in the calendar is becoming smaller. Generally, we try not to add stress to stressed markets – but sometimes we just have to pull the trigger.
We have found the best approach is to remain flexible. This can mean flexibility of issuing via syndication, tender or responding to reverse enquiry, in which bond to issue and in what volume, on timing, or in the volume of pre-funding we have at any point in time. Hopefully this approach minimises what we need to do in unfavourable conditions.
CINQUINA Flexibility is important and having a much smaller funding requirement naturally provides more capacity to finesse issuance.
It is a little more difficult to find a clear issuance window in the current climate, given the funding programmes of some of our peers. However, our larger borrower clients are amenable to discussions about available tenor, format and – to some extent – timing of lending. This provides options for us in accessing markets.
Although we are always looking ahead, we are also competing for air time among our peer group. The reality is the number of clear days in the calendar is becoming smaller. Generally, we try not to add stress to stressed markets – but sometimes we just have to pull the trigger.
NICHOLL We have been thinking about the inevitability of an RBA pullback and have calibrated our issuance so far this year to a point where it will be pretty smooth all the way through.
Whether the RBA tapers bond purchases or just stops, we expect the market reaction will not be huge – because everyone realises the programme will close at some stage in the near future. I think the market already has this largely priced in.
If we had to tread lightly on issuance for a couple of weeks in response to severe volatility, we are well prepared to do so. We have signalled a lot of issuance flexibility and made clear we will be issuing into demand as required. We will do whatever we can to support the market – but I don’t expect we will be required to do too much.
NICHOLL Our expected margin of error is narrower now than it was 12-18 months ago. But I view the risks as balanced and do not anticipate major threats on the horizon at this point.
KENNA It is early days and the focus should be on the health outcomes and living with COVID-19 among a heavily vaccinated population. I agree that it feels like the risks are well balanced, though.
The New South Wales government has announced a A$7 billion (US$5 billion) contingency fund for COVID-19 and productivity reform, so there is an acknowledgment that risk lies ahead.
